A stock trades at a Current Market Price of Rs. 400. It reported an EPS of Rs. 20 for the past year, and consensus research projects next year's EPS to expand to Rs. 25. What are the Trailing PE and Forward PE of the stock?

[ A ]Trailing PE = 16.0x; Forward PE = 20.0x

[ B ]Trailing PE = 20.0x (400 / 20); Forward PE = 16.0x (400 / 25)[ CORRECT ]

[ C ]Trailing PE = 5.0x; Forward PE = 6.25x

[ D ]Both Trailing and Forward PE are exactly 25.0x

Takeaway

Option B is correct: Trailing PE = 20.0x (400 / 20); Forward PE = 16.0x (400 / 25)

Derivation

The Price-to-Earnings (PE) ratio measures the price investors pay for each rupee of company earnings: (1) Trailing PE uses historical earnings (e.g., past 12 months or preceding fiscal year): Trailing PE = Market Price / Historical EPS = Rs. 400 / Rs. 20 = 20.0x. (2) Forward PE uses forecasted future earnings: Forward PE = Market Price / Projected Next Year EPS = Rs. 400 / Rs. 25 = 16.0x. When earnings are expanding, Forward PE is lower than Trailing PE because current market price discounts higher future earnings. This tests PE multiple interpretation. The common error is inverting trailing and forward metrics.

Why the others fail

A — Trailing PE = 16.0x; Forward PE = 20.0x

This option reverses the two ratios; Forward PE is 16.0x (using higher future EPS 25), while Trailing PE is 20.0x.

C — Trailing PE = 5.0x; Forward PE = 6.25x

5.0x and 6.25x result from dividing EPS by an arbitrary factor rather than dividing market price by EPS.

D — Both Trailing and Forward PE are exactly 25.0x

Trailing and forward multiples diverge whenever earnings are projected to grow or contract over the forecast period.